Retail investors, mid-caps stand out in China's stock rally

SHANGHAI (Reuters) - Heartened by signs of an end to a long-running trade war with the United States and monetary easing at home, China’s stock indices have vaulted by a fifth since the beginning of this year and recovered a big chunk of 2018’s losses.

FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China September 7, 2018. REUTERS/Aly Song/File Photo/File Photo

The Shanghai stock index scaled the 3,000 mark for the first time since June this month. The rally has been characterized by heavy retail participation, rising foreign flows into the country and soaring turnover.

Here are some of the salient features of this rally:

China has outperformed its Asian peers and most other global stock markets this year.

Beijing’s efforts to support an economy growing at its slowest pace in 28 years, through tax cuts and government spending, are widely seen as the critical factor behind the recent run-up.

On top of that, the United States and China are possibly in the final weeks of discussions to hammer out a deal to ease their tit-for-tat tariffs dispute.

The rally has been dominated by mid-cap firms. Shares in Eastern Communications have seen a jaw-dropping 752 percent gain since late November amid speculation the company would be a beneficiary from China’s 5G tech push, even as the firm repeatedly clarified it has no revenue whatsoever from 5G business.

Trading volumes have jumped while investor confidence has been picking up. The number of Chinese stock investors had climbed to 147.5 million in January 2019, while market turnover soared to 2015 highs. Retail investors accounted for 99.6 percent of total investors.

Private equity funds have become one of the driving forces behind the rally. Their average equity exposure stood at 72 percent in March 2019, its highest since at least late 2017, showed data from Simuwang.com, an industry website.

Mutual funds are joining the party too, looking for better returns in stocks. According to the data from China Securities Regulatory Commission, the number of equity mutual funds in China had been steadily increasing in the four quarters of 2018, while their fund shares and net asset value were also on a rising trend.

The cheapness of China’s shares, despite the rally, is part of the appeal. The SSEC currently trades at 12.6 times earnings, compared with an earning multiple of roughly 18 for the Dow Jones Industrial Average.

Foreign investors have splurged hundreds of billions of yuan snapping up A-shares, particularly after China promised more access for them by combining two inbound investment schemes.

The wall of money rushing in even forced global index provider MSCI to take off a stock from its index. MSCI said it would remove Han’s Laser Technology from its China indexes and slash the weighting of Midea Group Co, citing issues triggered by foreign ownership ceilings.

The ownership limit could become a bigger headache for overseas investors buying Chinese stocks, especially small- and mid-caps.

Alongside the speculative frenzy that has seen many small cap stocks hitting fresh highs, shares in China’s leading pig producers have soared to record levels despite the industry facing one of its worst disease outbreaks in years, as investors bet on tightening pork supplies and strong government support for leading producers.

As of Tuesday, Wens Foodstuff Group, the biggest start-up firm and mainland China’s top hog farmer, had surged more than 60 percent since the end of the Lunar New Year holiday.

Retail borrowing to speculate in stocks is also back with a vengeance as regulators shift their focus back to growth after a lengthy clampdown on riskier types of financing.

Some investors have even turned to the gray market for financing as they tried to maximize their gains in the rally, although China’s securities watchdog is gradually tightening its scrutiny over this form of shadow lending.

(For a graphic on 'China investors borrow more to buy shares' click tmsnrt.rs/2UBbT0u)